The ADP jobs report came in 50% higher than expectations at 215k net non-farm jobs added versus 140k expected. As well, November was adjusted upward to 148k from 118k. In November the original expectation was 125k – so November moves from a miss to a beat versus expectations.
These numbers appear to be a good omen for employment growth momentum going into 2013. Our thesis is that margin growth will slow, offset by higher revenue growth for our companies as the US economy picks up steam and hiring accelerates. In particular, we see Mitel Networks (TSX:MNW) benefiting directly from the upward trend in US employment because new employees will need incremental technology as they are onboarded – especially communications solutions like phones, collaboration, and connectivity.
Even better for Mitel was that 60% of the total non-farm payroll increase was in its SMB/SME target market, and 41% of the total jobs created were in the SME space, which is MITL’s absolute sweet spot.
Tomorrow, the US Commerce Department will release its official numbers, which are typically correlated well with ADP. Our estimate for the next quarter for Mitel is $144M of revenue and $28.5m of EBITDA. The revenue estimate is at the high-end of company guidance provided at the end of November – and we are comfortable with the estimates. As well, we think that Mitel is setting up to have a really good second half of its fiscal year – which it hinted towards during our September conference.
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As usual, our expectations for 2013 are tempered by some macro risks. In 2011, as the US Congress muddled through the Debt Ceiling debate, job creation tanked. The republicans in the US Congress have signaled that they expect to do the same again in March. If the process includes more brinkmanship, then we could see a temporary dip in job creation, which could impact our employment growth thesis, and possibly MITL performance in the first quarter of FY’14. If US Congress opts to impose short-term austerity measures as it threatens, then we could see another almost immediate US recession because American have not finished fixing their balance sheets. Although we don’t think that Congress would be so careless as to carry through on the threat, such an event could alter our thesis.
The offset to fiscal policy risk created by US Congress could be more the aggressive monetary policy announced by the US Federal Reserve in November, which has published an objective to create long-term bond exchanges (Operation Twist indefinite) until US unemployment declines to a target of 6%.
You can view Ron Shuttleworth’s entire 2012 Tech Year End Review and 2013 Outlook here.